Connecticut State R&D Expenses Tax Credit

 

Credit Overview:

  • A credit against the corporation business tax is allowed for research and development expenditures deductible under IRC § 174 and for basic research payments deductible under IRC § 41

  • Expenditures funded by grant, contract, or otherwise by a person or governmental entity other than another corporation included in a combined return do not qualify for the credit

  • A corporation must reduce this credit by the amount of any incremental credits taken under Conn. Gen. Stat. §12-217j or any credits for grants to higher educational institutions taken under Conn. Gen. Stat. §12-217l

  • A qualified small business that cannot take the credit in a particular year because no tax is owed can either carry the credit forward or can apply to the Commissioner to exchange the credit for a credit refund equal to 65% of the value of the credit

Eligible Entities: C-Corporations only

  • A tax credit may be applied against the tax imposed under Chapter 208 of the Connecticut General Statutes for the incremental increase in research and experimental expenditures conducted in Connecticut. S Corporations are exempt from the tax imposed under this chapter.​

Deadline for Tax Filing: Due with Connecticut Tax Return with application forms (see below)

Data Required to Compute Credit:

  • Claim Period Qualified R&D Expenses (QREs)

  • Qualified Research Expenses for Prior 1 Year

CT R&D Credit Summary: Two credits are available for Connecticut (RC and RDC).

  • (1) Incremental R&D Credit 

  • (2) Non-incremental R&D Credit ​

(1) Incremental R&D Credit:

The tax credit is equal to 20% of the excess of the qualified research and experimental expenses during the current claim year over the qualified research and experimental expenses during the prior year. Moreover, the credit may be partially refundable for taxpayers whose gross income does not exceed $70 million AND have no tax liability.

Carryforward and Carryback Limitations: The tax credit shall be carried forward for 15 successive income years until the tax credit is fully taken. No carryback is allowed.

How to Claim the Tax Credit

  • Complete Form CT-1120RC, Research and Experimental Expenditures Credit, and attach it to Form CT-1120K, Business Tax Credit Summary. The following information should be attached to Form CT-1120RC:

    • A full and complete description of the nature of the research projects conducted by the company during the income year, and the location(s) where the research is conducted;

    • A full and complete description of the methods used to obtain the amount spent directly on research and experimental expenditures conducted in Connecticut; 

    • A detailed description of each source of information used to complete the tax credit, including the methods and calculations of expense allocation, if any; and

    • The job title and detailed description of each employee whose wages are included in the research expenditures.

Exchange of Tax Credit for Refund - Yes

  • A qualified small business that cannot take this tax credit in an income year in which it could otherwise be taken, as a result of having no tax liability, may exchange such tax credit with the State of Connecticut for a credit refund equal to 65% of the value of the tax credit or may elect to carry such tax credit forward as indicated above.

  • For the purpose of exchanging tax credits, qualified small business means a company that has gross income for the previous income year that does not exceed $70 million and has not met the gross income test through transactions with a related person.

  • A qualified small business may receive no more than $1,500,000 of tax credit refund for any one income year. A qualified small business that files a Form CT-1120 is permitted to exchange this tax credit if:

    • The company’s apportioned amount of net income is zero or negative, regardless of the amount of its capital base tax; or

    • The company’s capital base tax is equal to $250.

  • A qualified small business that files as part of a combined group on a Form CT-1120CU is permitted to exchange this tax credit if the group pays tax on the capital base and:

    • The qualified small business’s apportioned amount of the combined group’s net income is zero or negative, regardless of its portion of the capital base tax; or

    • The qualified small business’s portion of the capital base tax is equal to $250.

 

A qualified small business that wishes to exchange tax credits must complete Form CT-1120 XCH, Application for Exchange of Research and Development or Research and Experimental Expenditures Tax Credits by a Qualified Small Business, and submit such form at the same time it files its return for the income year on or before the original due date or, if applicable, the extended due date of the return. No application for refund of the tax credit may be made after the due date or extended due date of the return.

​​

(2) Non-incremental R&D Credit:  

​A Qualified Small Business is entitled to a tentative tax credit equal to 6% of its research and development expenses.

  • If it results in a greater tentative tax credit, companies headquartered in an Enterprise Zone, with revenues in excess of $3 billion, employing more than 2,500 employees, shall multiply their research and development expenses by 3.5% instead of using the tax credit percentage listed above.

 

All other companies: calculate their tax credit as provided below based on the amount of qualified research and development expenditures in Connecticut, as follows:

  • $50 million or under, 1%

  • Over $50 million but not over $100 million, $500,000 plus 2% of the excess over $50 million

  • Over $100 million but not over $200 million, $1.5 million plus 4% of the excess over $100 million

  • Over $200 million, $5.5 million plus 6% of the excess over $200 million

Carryforward and Carryback Limitations: Tax credits that are allowed but that exceed the limitation amounts may be carried forward to each successive income year until such credits are fully taken. All allowable tax credits from prior years must be carried forward and applied before the current year tax credit may be taken. No carryback is allowed.

Connecticut Wage Base Reduction

  • Taxpayers that pay or incur more than $200 million in research and development expenses in an income year must reduce their Research and Development tax credit if workforce reductions exceed certain percentages.

  • To determine the extent of workforce reductions, the current Connecticut wage base is compared to a historic Connecticut wage base determined from the third full income year immediately preceding the current income year.

  • The Connecticut wage base is calculated from the total wages assigned to Connecticut with exclusions for the ten most highly paid executives of the taxpayer.

  • The Research and Development tax credit must be reduced by the following percentages based on the extent of the workforce reduction from the historic wage base.

    • Workforce Wage Base Reduction Percentage:

      • Not more than 2%, 0% Reduction Percentage​

      • More than 2% but not more than 3%, 10% Reduction Percentage

      • More than 3% but not more than 4%, 20% Reduction Percentage

      • More than 4% but not more than 5%, 40% Reduction Percentage

      • More than 5% but not more than 6%, 70% Reduction Percentage

      • More than 6%, 100% Reduction Percentage

How to Compute the Tax Credit

The allowable tax credit is the lesser of:

  • One-third of the amount of the tax credit allowable for any income year; or

  • The greater of:

    1. 50% of the taxpayer’s tax liability, determined without regard to any tax credits allowed by this tax credit; or

    2. The lesser of 200% of the tax credit otherwise allowed for the income year or 90% of the taxpayer’s tax liability, determined without regard to this tax credit.

Any taxpayer also claiming a corporate business tax credit on Form CT-1120RC, Research and Expenses Tax Credit, MUST reduce the amount of research and development expenses that might otherwise be taken into account in computing the allowable credit by the amount of the incremental increase in research and experimental expenditures, as computed on Form CT-1120RC.

 

Calculate the tax credit by multiplying the amount spent on research and development conducted in Connecticut by the appropriate percentage.

How to Claim the Tax Credit​

  • Complete Form CT-1120 RDC and attached it to Form CT-1120K. The following information should be attached to Form CT-1120 RDC.

    • A full and complete description of the nature of the research projects conducted by the company during the income year, and the location(s) where the research is conducted;

    • A full and complete description of the methods used to obtain the total expenditures and payments for research and experimentation and basic research conducted in Connecticut;

    • A detailed description of each source of information used to compute the tax credit, including the methods and calculations of expense allocation, if any; and

    • The job title and detailed description of each employee whose wage are included in the research expenses.​

Refundable/Transferable Tax Credit: Yes

  • Exchange of Tax Credit:

    • A taxpayer ("qualified small business") whose gross income does not exceed $70 million and who cannot take the credit as a result of having no tax liability under the Corporation Business Tax may elect to carry 100% of the credit forward or may be eligible to exchange the credit with the state for a credit refund equal to 65% of its value, subject to certain limitations. See Conn. Gen. Stat. § 12-217ee. See Form CT-1120 XCH, Application for Exchange of Research and Development or Research and Experimental Expenditures Tax Credits by a Qualified Small Business, for eligibility. Only tax credits earned in the current year and entitled to be claimed in the current year may be exchanged.

    • A qualified small business may receive no more than $1,500,000 of tax credit refund for any one income year. A qualified small business that files a Form CT-1120 is permitted to exchange this tax credit if: The company’s apportioned amount of net income is zero or negative, regardless of the amount of its capital base tax; or The company’s capital base tax is equal to $250.

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